Poverty In America

Finally there's some good news

Aaron Bernstein

October 18, 1999, 12:00 AM EDT

You don't have to tell Maria D. Huertas how hot the U.S. economy is these days. Two years ago, she landed a $12.58-an-hour job making shoe parts at a new Allen-Edmonds Shoe Corp. factory that had just opened in downtown Milwaukee's gritty Hispanic ghetto. The new job pays almost twice the $7 an hour Huertas made in her last job, sewing women's clothing at a factory four blocks away. Today, she's taking home more than she ever has, as is her husband, Victor, a crane operator. "The economy has been very good to us," says Huertas, who recently bought a 1999 Isuzu Rodeo.

Huertas' story marks a long-overdue turning point in the U.S. economy. For nearly three decades, workers in the bottom half of the economy suffered an endless downward spiral as their wages sank further and further behind inflation. Even boom years left them largely untouched. Many experts wondered whether conventional trickle-down theory--the idea that economic growth eventually benefits almost everyone--had been upended by the relentless forces of globalization, the decline of unions, and new technology. These powerful trends have battered low-skilled workers such as Huertas the hardest, creating a swelling underclass of working poor who could never earn enough to escape poverty, even with a full-time job.

Now, at long last, today's rip-roaring economy is starting to sweep up workers at the bottom of society, handing them real economic progress for the first time since the 1960s. Productivity gains spurred by the New Economy have fueled strong demand in virtually all sectors of the economy, creating the tightest labor market in a generation.

Just in the past two years or so, these extremely low jobless rates have lit a fuse under bottom-end pay, which has shot up by some 10% after inflation during this time--the largest gain in decades. Even the most disadvantaged groups are participating in the sudden U-turn: The inflation-adjusted wages of young African-American males who have never gone to college, for example, have soared by 12% since 1996. And the Census Bureau's 1998 report, released on Sept. 30, shows that the annual uppermost income for the poorest fifth of black households has jumped by 20% since 1992, to $9,160, even after accounting for inflation (charts). Of course, it's still remarkably low, but the growth was twice that of the real incomes of the average U.S. household in the same period.

The U.S. economy is so robust that its impact is reaching right into the heart of America's long-suffering cities. For the first time in nearly half a century, Corporate America is pouring billions of dollars in new investment into urban America. Employers such as United Airlines Inc. and Sprint Corp., which have hired thousands of welfare moms, are so desperate for new workers that they now go places they never before considered. Other companies, be they Walt Disney Co. or Starbucks Corp., are seeking expansion opportunities in even the toughest ghettos, where crime is declining, more people are working, and underserved customers now have more money to spend. All together, central cities are seeing the largest drop in poverty in 30 years, and inner-city residents are starting to get a few more of the basic services the rest of the country takes for granted, from large supermarkets to easier credit. "We have a resurgence of downtown America, with jobs being created there again," says Susan M. Wachter, a nominee to head the Housing & Urban Development Dept.'s policy unit.

Don't misunderstand. A few years of hot growth haven't magically cured all the social and economic ills that plague the U.S. Look at the slightly U-shaped chart of low-end wages (left), and you can see that workers at the bottom haven't yet climbed back to where they were in the early 1980s, much less the 1970s. And while the U.S. poverty rate has plunged by 2.5 percentage points in the past few years, to 12.7% last year, it remains above the 11.1% low achieved in 1973. African Americans remain much further behind whites economically: Their poverty rate hit a record low last year, but that only brought it down to 26%, more than double the white rate.

Plenty of other problems are a long way from being solved--from families without medical insurance to students attending lousy schools. Nor has the chasm between the poor and the rich narrowed in recent years. Income inequality stopped worsening since 1994, Census figures show, as low-income families' incomes began to rise at the same pace as those in society's upper tiers. But the gap is still stuck at the highest levels since the Great Depression, according to Census figures. Continued high levels of immigration from some of the poorest regions of the world haven't helped matters. Although newcomers often inject new blood into local economies, studies show that their willingness to accept extremely low pay has dampened wages at the low end.

Still, there's real progress and even hope right now for most Americans on the low rungs of the economic ladder. In fact, while many experts hark back to the golden economic era of the 1960s, what's happening now may actually be better. The '60s boasted 4% unemployment and across-the-board wage gains, but it was also a time when the ghettos burned amid race riots and whites fled the urban devastation to seek safety in the suburbs. Now, cities are beginning to reemerge from those long, troubled years. "Trickle-down is finally happening after 30 years," says Ronald B. Mincy, a poverty expert at the Ford Foundation.

JUST A BLIP? The key question now is how much longer we can keep the good times rolling. Of course, Americans at every level will suffer when the inevitable downturn finally hits. But the fate of the working poor and inner cities are at a particularly precarious juncture. Several more years like the past two or three might lock in enough structural changes in central cities to reverse the decades-long decline at the bottom. If that happens, the next slump would still probably whack low-wage workers the hardest, as most recessions have done. But they would stand a better chance of picking up where they left off when the economy turned up again. If the economy tumbles before this can happen, many of the recent gains could turn out to be just a blip on the screen.

The high stakes put a new burden on the Federal Reserve and other policymakers. Although the Fed just demurred on hiking interest rates at its Oct. 5 meeting, the trade-off between low unemployment and the inflationary threat of strong economic growth has never been so stark. True, other factors have helped low-wage workers and inner cities. Crime has plunged in most cities, and big-city mayors are working with the private sector to lure companies back with tax breaks and other incentives. Shifting middle-class attitudes, too, have made many downtowns chic places to live and work again in recent years. But all of these factors together wouldn't sustain an urban revival without the fuel provided by fast growth and drum-tight labor markets. If the Fed hits the brakes now, the fragile gains at the bottom could come to a sudden halt. "This recovery is critical for us to finally start solving some of our long-term social and economic problems, which raises the stakes for Fed policy," says Harvard University labor economist Richard B. Freeman.

The social progress under way flows directly from the extremely low jobless rate, which has edged down to around 4%, a level last achieved in the go-go economy of the 1960s. After two solid years, this appears to be the true level of full employment--not the 5% or 6% that most economists had assumed it to be since the 1970s. With labor so scarce, employers have lured virtually everyone with marketable skills back into the labor force who wants to work. In desperation, they have been forced to reach out to employees most companies would have previously shunned. Just look at workers in the lowest 10% of wage earners. Their inflation-adjusted average pay plunged by 18% between its 1979 peak and 1996, when it hit a low of $5.37 an hour. Then Congress raised the minimum wage, and unemployment fell low enough so that even the least-skilled workers could find jobs. The result: Low-end wages rose to $5.91 through the first half of 1999, a 10% real gain, according to an analysis of Census data by the Economic Policy Institute, a Washington (D.C.) think tank. Pay rates for workers in the lowest 20% and 30% of wage earners show a similar U-shaped pattern.

Tight labor markets mean not only higher wages but also more job security and more opportunities to earn extra with overtime hours, setting in motion an overall improvement in living standards. It means that the lives of people like Judy R. Ford can change dramatically. Ford, 55, has seen her annual pay as a Chicago hospital technician jump to nearly $27,000, from $20,000 in 1993. Just as important, she has raked in an extra $13,000 in the past year by working overtime. This gave Ford, who raised a daughter alone after she and her husband separated 25 years ago, enough for a down payment on a house, the first she has ever owned. In early September, Ford moved out of a dumpy one-bedroom rental in a run-down section south of Chicago into a $57,000, two-bedroom condo with central air and an eat-in kitchen in a tidy blue-collar neighborhood. "I never dreamed that I'd own a home, particularly as a single woman and at my age, because I didn't think anyone would lend me money," says Ford. "But I'm secure in my job, and the future looks good."

Even groups virtually written off by experts are seeing real wage gains. Young African-American males with low-level skills are among the most likely to use drugs, spend time in prison, and drop out of school, making them a group long shunned by employers. But they have been among the biggest winners recently, largely because their unemployment rates, among the country's highest, have come down the most, according to an analysis by Harvard's Freeman and William M. Rodgers III, an economist at the College of William & Mary in Williamsburg, Va.

From 1992 to 1998, 16- to 24-year-old African-American men with a high school education or less saw their employment rates soar from 46% to 54%, while the share of the entire 16-plus population with a job climbed only four percentage points, the study found. The result: The hourly pay of young black men has jumped by an inflation-adjusted 12% since 1992, to $8.23 an hour in 1998. "Their wages finally took off when unemployment got low enough," says Rodgers.

DOWNTOWN JOBS. Such gains are inextricable from the revival of America's cities, where a majority of the working poor reside. That's the story of Huertas' employer, Allen-Edmonds Shoe. It opened its Milwaukee factory in 1997 after years of fruitless efforts to lure workers to its headquarters in Port Washington, Wis., about 30 miles away. "We tried buying workers bus tickets, even making car loans to workers, but we just couldn't get enough people to come up here," says Allen-Edmonds CEO John Stollenwerk. "So we decided to bring the work to the people."

Plenty of other companies now see inner cities as a vast hiring hall. Corporate America has snapped up more than 400,000 welfare mothers in the past two years, according to the Welfare to Work Partnership, a corporate group launched in mid-1997 by United Airlines, Burger King, UPS, Sprint, and Monsanto. Many former recipients haven't yet come out ahead, because they don't earn enough to pay for child care or for the health-care benefits they received on welfare. Still, they now can participate in the economy more easily, giving them hope for advancement that simply doesn't exist on public assistance.

For example, United Parcel Service of America Inc., whose high turnover rate requires it to sign up more than 60,000 new workers a year, has hired 25,000 former welfare recipients in the past two years. UPS uses mentors to help former recipients learn basic skills such as how to show up on time and dress appropriately. The entry-level jobs pay $8.50 to $9.50 an hour, mostly for package-sorting jobs. "You have to look for new employees wherever they may be," says UPS human-resources chief Lea N. Soupata. She says the company is very satisfied with the recipients, whose retention rate after a year is running at up to 70%, vs. 50% or so for all part-timers at UPS.

A Washington (D.C.) hotel and restaurant coalition is digging even deeper for workers. In early September, Marriott Hospitality High School opened with 65 students, expecting to grow to 200 in two years, in a run-down section of downtown that burned during 1960s riots. Now the area, near a new convention center under construction, is bustling with cranes as Marriott and other chains build in the area. The nation's first charter school devoted to hospitality plans to teach culinary arts and hotel management along with a regular high school curriculum. The students are nearly all poor African Americans from the neighborhood. "The kids coming out of this program will be capable of entering a position immediately, which will help the industry to defray training costs," says Dede McClure, head of the Greater Washington Hospitality Foundation, a coalition of hotel chains and restaurants that ponied up the $3 million startup costs and $1.5 million annual operating expenses for the school.

BACK TO MOTOWN. Even Detroit, long tagged "Murder City" for its terrible crime rate, is enjoying billions of dollars in new investment and a 9% jump in employment since 1993. And low-wage workers are among the biggest beneficiaries. Just ask Dean Jacobs, 40, who left a job at a Detroit commercial cleaning company in 1996 and had to start over as a sewing machine operator earning $5.50 an hour. Since then, his employer, Canvas Products Co., has prospered and expanded, allowing Jacobs to nab several promotions, lifting his pay to almost $13 an hour. And like Allen-Edmonds, Canvas Products moved back to central Detroit in 1996 after years in the suburbs.

Saturated with shopping malls and traffic jams, many suburbs are now places with limited growth prospects. Last summer, President Clinton toured the country with a clutch of CEOs to promote ghettos as emerging markets that should be just as attractive to Corporate America as those overseas. Plenty of companies already had come to a similar conclusion. "Others haven't made the investment in inner cities, so there is pent-up demand there," says Charles C. Conaway, president of CVS Corp., a Rhode Island-based national drugstore chain that has blanketed Detroit with 20 new stores since 1996 and plans to expand its stores in New York, Baltimore, Philadelphia, Boston, and Washington.

Harvard University business school professor Michael E. Porter has tried to quantify how much demand there really is. Five years ago, he started the Initiative for a Competitive Inner City (ICIC), which last year analyzed the incomes and spending of 7.7 million households living in every zip code in the country defined as inner city. The conclusion: Ghetto residents shell out some $85 billion a year on retail goods alone, or nearly 7% of total U.S. retail spending. But they spend more than 25% of those dollars in non-inner-city neighborhoods, the ICIC discovered after it matched spending with retail sales in each zip code. In other words, inner cities have an unmet retail demand of at least $21 billion a year, a figure mounting even more rapidly now that family incomes are rising faster in many ghettos. "We found that there's actually an attractive market in many urban areas," says Porter.

Many companies are jumping into the breach. In the past year, Starbucks and Disney have made moves into Harlem, lured by a 60% reduction in crime and more than $550 million in government funds and tax incentives. In April, the virtually all-black ghetto got its first chain supermarket, a Pathmark. Its first mall, the $65 million Harlem USA, is due to open soon, followed by a 430-room hotel and a shopping center anchored by Home Depot Inc. and Costco Cos.--the first forays into any part of Manhattan for both chains. "The boom has changed the perception of this area, and now big retailers are more willing to come in," says Regina L. Smith, project director of the Harlem Business Alliance.

It's not just retailers who see new opportunities. In 1997, Aetna Inc. formed a Domestic Emerging Markets Group to sell 401(k)s and mutual funds to underrepresented groups such as minorities and women-owned companies. As part of the effort, Aetna is developing products for lower-income families, such as funds requiring lower monthly contributions. The group has targeted a dozen major urban areas and has already surpassed $313 million in assets under management--50% higher than the $200 million goal set for this year. "We found in genuine emerging markets around the world that whenever people claw their way into the middle class, they buy life insurance, health care, and some kind of retirement savings," says Aetna CEO Richard L. Huber. "Now, we're targeting these markets in the U.S. because they are underserved."

Other companies are lured by a new view of inner cities as promising commercial locations that are close to city business districts. Since early last year, Marriott International Inc. has opened a dozen no-frills hotels in seedy downtown areas, including an abandoned molasses factory in New Orleans, a former plumbing company headquarters in Omaha, and a converted City Hall annex in Philly. The goal: to offer corporate road warriors a downtown location--and find new expansion opportunities now that Marriott has already blanketed the 'burbs. And Kansas City (Mo.)-based H&R Block Inc. is building a new back-office operation for 200 permanent workers and an additional 600 or so seasonal ones in that city's most blighted area. "The suburban locations we looked at gave us access to employees living in just one quadrant of the city," says Terrence R. Ward, Block's vice-president for facilities. "Here, we can draw from the entire metro area, a key concern with unemployment at just 2.8%."

Ghettos also can provide cheap real estate and tax breaks for companies willing to take a risk. In 1996, Lowell Gray, the founder and CEO of Shore.Net, a startup Internet service provider, realized that his fast-growing company had outgrown its rented space in Lynn, Mass., a decayed industrial town near Boston that lost most of its factories in the 1980s. He scoured the surrounding suburbs but decided instead to buy and renovate a 100-year-old building in Lynn that lay abandoned after the last occupant, a leather-goods manufacturer, had fled overseas. "We choose to invest here because of the infrastructure, access to the commuter train, and because it was cheaper and we got tax incentives," says Gray. About half of his company's 86 workers do customer-support work, which doesn't require a college education. So Shore.Net gives preference to local low-income residents, who land jobs starting at $18,000 a year. "There aren't many other jobs like this around here," says Mary Ann Reyes, a local resident and single mother who got a job last summer placing customer orders.

GHETTO EQUITY? The new outlook for America's downtowns has even prompted a few brave souls to set up equity investment funds to capitalize on the trend. Last summer, Bank of America Corp. set up a $500 million "Catalyst Fund" to make equity investments in run-down urban areas. And Harvard's Porter and ICIC were so convinced by their own research that they have formed a joint venture called Inner-City Ventures Equity Partners with American Securities Capital Partners, a private investment firm in New York that manages $2 billion of wealthy families' money. The venture is about to issue a prospectus to raise a $100 million fund to take equity stakes in inner-city companies in fast food and health care, among other sectors. "We see opportunities to put money to work in the inner city and earn 20% to 30% annual returns," says ACS President Michael G. Fisch. His firm and ICIC have put a total of $10 million of their own money into the fund.

The burst of economic activity has already taken a big bite out of urban poverty. After years of soaring past the national poverty rate, the share of central city residents below the poverty line has come down by 2.7 percentage points, to 18.5%, since its all-time high in 1993, according to an analysis by HUD's Wachter. That's twice as much as the decline in suburban poverty and the largest improvement since 1967, when the data on urban/suburban poverty first became available. Similarly, the poorest fifth of households in inner cities have seen their per capita wages beat inflation by 16% since 1994, Wachter found. By comparison, the average U.S. family has gained just 8% since then.

The U.S. still has a long way to go before all of its citizens are sharing fully in the prosperity that reigns today. After all, the 10% pay hike that the lowest workers have enjoyed in the past two years amounts to a pitiful 60 cents an hour. Still, even this is good news after the decades of unrelenting pay cuts for those at the bottom. And it won't keep up unless employers continue to feel a compelling need to hire these workers.

Therein lies the lesson: The best way to cure poverty is to get the jobless rate down to 4% or so--and keep it there for years to come.

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